# Chapter 8.3 Practice

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Nominal GDP
The value of final goods and services evaluated at current-year prices.
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Why does inflation make nominal GDP a poor measure of the increase in total production from one year to the next?
When nominal GDP increases from year to year, the increase is due partly to changes in prices and partly to changes in quantities.
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Real GDP
The value of final goods and services evaluated at base-year prices.
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How does real GDP deal with the problem inflation causes with nominal GDP?
All of the above: Real GDP uses the prices of goods and services in the base year to calculate the value of goods in all other years. Real GDP separates price changes from quantity changes. By keeping prices constant, we know that changes in real GDP represent changes in the quantity of output produced.
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How is the GDP deflator calculated?
GDP deflator = (Nominal GDP / Real GDP) x 100
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Assuming that inflation has occured over time, what is the relationship between nominal GDP and real GDP in each of the following situations? a. In years after the base year, nominal GDP __ real GDP. b. In the base year, nominal GDP __ real GDP. c. In years prior to the base year, nominal GDP __ real GDP.
a. is greater than b. is equal to c. is less than
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8.3-04a If the base year is the year 2009, then real GDP for 2014 equals \$__ and the real GDP for 2015 equals \$__.
All of the cotton is used to produce shirts and is therefore considered an intermediate good. Since 2009 is the base year, calculate real GDP for 2014 by multiplying the quantity of each final good in 2014 by the price of the same good in 2009. Sum the values for all final goods.
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8.3-04b The (annual) growth rate of real GDP in 2015 is __%.
The growth rate for real GDP in 2015 is the percentage change in real GDP between 2014 and 2015. Percentage change is calculated using the following formula: RGDP(2015) - RGDP(2014) / RGDP(2014) x 100
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Indicate whether you agree or disagree with the following statements. "If nominal GDP is less than real GDP, then the price level must have fallen during the year."
Agree. Nominal GDP will be less than real GDP if the price level falls and is lower than the base year's prices.
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"Whenever real GDP declines, nominal GDP must also decline."
Disagree. Real GDP falls if output falls. Nominal GDP can increase if output falls and prices rise.
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"If a recession is so severe that the price level declines, then we know that both real GDP and nominal GDP must decline."
Agree. If both output and prices are falling, then both real GDP and nominal GDP will fall.
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"If real GDP stayed the same while nominal GDP declined between 2008 and 2009, then the GDP deflator must also have declined.
Agree. If nominal GDP declined between 2008 and 2009, ten the GDP deflator must also have declined.
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The movie Avatar overtook the Titanic to become the highest-grossing movie of all time. An article on Forbes.com notes that "the average ticket price in 2008 (Avatar was released in 2009) was \$7.18, up 56% from prices in 1997 when Titanic was in theaters." The article states that "A look at domestic grosses (box-office receipts) adjusted for inflation shows a more realistic view of Avatar's performance." Adjusting for inflation shows a more realistic view of Avatar's performance at the box office since
it shows the increase in ticket prices in constant dollars.
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A more accurate measure of how well a movie has performed at the box office would be
the inflation adjusted dollar value of tickets sold.
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Newspapers do not report the number of tickets sold
since the dollar value of tickets sold is a better measure.
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The comparison of the total number of tickets sold by all movies in 1939 with the total number of tickets sold by all movies in 2011
will not be a good way to measure how the relative importance of movies in the economy has changed over time.
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According to an article in the Economist, the Russian economy "may not have been booming by 7% a year, as in the mid-2000s, but GDP grew by 3.6% in 2012." These two percentages are referring to changes in
real GDP. These two percentages are referring to changes in real GDP which represents changes in the quantity of goods and services produced in the economy.
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Real GDP is